Once you have a process for making money with your business, then you might consider getting a loan. I would only suggest getting a loan if your business is making a profit & you have a process for turning a $1 into $2. (or you have a proven track record for making money with your previous projects)Fall in the love with the process of helping people and providing value & the money will follow. Click To Tweet
Far too many times, I have seen people get loans just to purchase business cards, rent office space, buy office supplies and even hire staff without having a real business. Before you start, you should always fast-track your ideas to determine profitability.
- Do not start a business for the money.
- Start a business to provide value / make a difference.
- Create a process to convert the value into money.
- Fine-tune that process & scale up your business.
Now that you have the process down and your business is making money, here are 12 options for startup loans.
- Friends and Family
- SBA Loans for Startup Business
- Line of Credit
- Home Equity Loan
- Rollover for Business Startup (ROBS)
- Microloans from Nonprofit Lenders
- Small Business Credit Cards
- Equipment Financing
- Angel Investors
- Venture Capitalist
Friends and Family
Family is probably the first place you should turn to when starting a business. I have 5 brothers and sisters, and each one of us has started a business throughout the years. We all chipped in to buy my sister’s hair salon equipment and a few of us helped paint / stage the salon. I also remember when my other sister started a consignment shop, we all pitched in to help setup the store.
Along with money, family and friends are probably willing to help with setup if you make it fun. There’s nothing like a unappreciative family grouch who is not grateful for their family support.
There are four steps to going to friends and family when asking for money:
- Have a solid business plan & a process for generating profits.
- Ask for enough money to fund your business for the year.
- Setup a payment plan for your friends and family.
- Don’t assume and treat this like free money.
SBA Loans for Startup Business
Government loan programs offer financial support to people starting or expanding a business. This helps those who may have trouble qualifying for a traditional bank loan.
In these programs, you’ll apply by creating a loan package with a participating lender. The federal government will guarantee a portion of the loan and will repay the lender if you default. This government guarantee reduces the risk to the lender and increases the likelihood of a loan being offered.
Government Resources for Your Small Business
Use these government resources and services to find a loan that best suits your business needs:
- Small Business Administration (SBA) – Explore many types of loans for starting and expanding a business, handling disasters, and exporting goods.
- U.S. Department of Agriculture (USDA) – Get information on government-guaranteed loans for rural businesses and local program contacts.
- GovLoans – Research many types of federal loans for your business and learn how to apply.
- Small Business Lending Fund (SBLF) – This Treasury Department initiative provides capital to qualified community banks and community development loan funds (CDLFs). This helps promote economic growth and create new jobs.
If your business has a relationship with an SBA Express lender, you can borrow up to $25,000 fast under the SBA Express Bridge Loan program.
Line of Credit
There would be two reasons to get a line of credit. To establish a positive credit history and to gain access to short-term funding. Most businesses use lines of credit for operational expenses to increase inventory & operational expenses.
Once again, if you have a process in place to turning $1 into $2, then use a line of credit. Typically, the line of credit will give you checks to deposit into your business account, and the amount you deposit increases the balance of the line.
Home Equity Loan
Let’s say you have built equity into your house, and you’re thinking about a home equity loan to fund your business. I would not recommend getting a home equity loan for “high risk of failure” businesses like restaurants, bars and retail.
You would never buy inventory for risk of it losing value. If you have a process for turning a $1 into $2 and you need access to cash, then I recommend this loan (after you try a few others).
Crowdfunding raises funds for a business from a large number of people, called crowdfunders. Crowdfunders aren’t technically investors, because they don’t receive a share of ownership in the business and don’t expect a financial return on their money.
Here are the top five crowdfunding sites for small businesses.
Top Five Crowdfunding Sites for Small Businesses
Kickstarter is one of the most popular and best overall crowdfunding sites for small businesses because it supports all types of projects. The site has raised over $5 billion funding around 175,000 projects since 2009.
Indiegogo is a crowdfunding platform that allows you to tell your story, raise funds for your projects & people can become an early adopter for your project. Explore projects here.
GoFundMe is used mainly for personal hardships, but it works well for business projects too. I personally raised money for my mom’s chemo years ago, and we were able to offset a ton of the hospital bills.
Patreon is not just for musicians anymore. Podcasters, teachers, trainers, coaches and writers can use Patreon to grow an audience and start your crowdfunding efforts. And it’s free to use their platform (they take a percentage of each donation). Click here for details.
Fundable is an often overlooked platform, but this platform can raise millions for one project. You can easily create a profile & either raise money for equity or fulfillment. Click here for details.
Rollover for Business Startup (ROBS)
Rollovers as Business Startups is an option for an entrepreneur who has built up retirement savings but may not qualify for a business loan.
ROBS is a way to rollover your IRA into your business. If your business goes under, you will lose your retirement because you’re committing your retirement to finance your business.
ROBS is only available for C corporations and is very expensive to hire a lawyer to file the paperwork. Therefore, it might not be a good fit for small businesses or sole proprietorships.
Lawyers charge around $5,000 for setup and a monthly fee.
Microloans from Nonprofit Lenders
The SBA works with designated intermediary lenders across the country to provide financing to small businesses. Find an intermediary near you.
If you need access to $50,000 or less than an SBA Microloan is an option (beware of high interest rates). If you’ve tried and failed to get credit from these other sources, then a microloan is another avenue.
Small Business Credit Cards
Most credit cards have a 6 month to 12 months zero interest introductory rate. This is a great way to borrow money without a cost to you. On top of this 0% interest rate, these small business credit cards offer cashback & travel rewards that are very lucrative when you use it for your advertising.
For example, if you’re just starting out – you could easily apply for a Chase Southwest Airlines Rewards business credit card. Do you think you’re going to spend $1,000 within 90 days? Yes. So you get an additional 40,000 reward points, which can be used to get $400 cashback into your business.
On top of the cashback, you can also elect to use those points to travel. Here’s how to travel to most places for $11.20.
Once your introductory rate expires, please be on the lookout for interest rate fees. I recommend only charging what you can payoff for the month.
Looking to replace old equipment or add to your existing equipment inventory? Equipment financing or leasing is another option for startups.
Most lenders require a full-year of business with revenue coming in and the ability to process credit cards.
- Quick Approval Process
- Deduct Your Payments as Business Expense
- Keep Cash on Hand
The fastest way to get approved is to have cashflow statements & be able to show your money coming in. Also, you’ll want to have your business plan ready for your lender & lenders will advance you up to 100% of the cost price for each piece of equipment.
You may be able to hook up with an angel investor through one of the websites that provides entrepreneur and angel investor matching. If nothing else, you can at least get your business proposal before a wider audience. Here’s just a sampling to get you started:
Angel Capital Association (ACA) – The North American professional association of active accredited investors provides unparalleled access to trending ideas and professional knowledge to help improve returns and promote effective public policies for angels and startups. Although not a funding source, ACA provides entrepreneurs an inside view into how angels think.
- 14,000+ angels
- 250+ angel groups, accredited platforms & family offices
- Ideas. Returns. Connections.
Additional VC Companies
Gust (formerly Angelsoft) – Receive recommendations on the best places to find capital based on your specific needs and situation. Easily find accelerators and investor groups, then apply with your Gust Company Profile. Thousands of companies have used their profiles to collectively raise over $1 billion through the Gust angel network. Get Started
You can raise capital through Gust in four easy steps. First, you tell Gust about your startup. Second, understand how you compare with other startups. Third, get funding recommendations. Fourth, apply for investment.
The BC Angel Forum – Founded in 1997, Angel Forum is one of the longest serving angel networks in Canada and since September 2018 under new management.
Technology and non-technology pre-screened companies seeking equity financing of $100,000 to $1 million, deliver “live” presentations to pre-screened private and corporate investors.
Venture Capitalists AKS VC’s are an outside group that takes part ownership of the company in exchange for capital. The percentages of ownership to capital are negotiable and usually based on a company’s valuation (think Sharktank).
Investors can give you funding, and there are several ways to get venture capital right now.
- First – you want to look for individual investors or have investors find you.
- Share your business plan & results with investors. How much are you making & what are your plans to scale? I find that VC won’t invest in ideas. They want a proven track record or a proof of concept.
- Investors will look at your management team, your products and services and your financial statements before investing in your company.
- Work out the terms. You’ll want to make sure that you are getting a fair amount for either a share of the company or a loan to repay.
- Once you agree on a term sheet, VC money usually comes in rounds as each round plays an active role in growing the company. As your company meets a milestone, you get another round of VC money.
The SBA helps Businesses Find Funding
The Small Business Administration works with different organizations to provide federal financial assistance (grants) community resources for certain small businesses. If you can’t find any grants that fit your profile, you can see if you qualify for any of our funding programs, or schedule to meet with a counselor to talk about financing your business.
Grants for Research and Development
If your small business is engaged in scientific research and development, you may qualify for federal grants under the Small Business Innovation Research (SBIR) and the Small Business Technology Transfer (STTR) programs. These programs encourage small firms to undertake scientific research that helps meet federal research and development objectives and have high potential for commercialization if successful.
Here are recommended ways to get money when you’re first starting out.
Recommended Ways to Get Money to Start a BusinessNever start a business just for the money, start a business to make a difference. Click To Tweet
I want you to write this down. Never start a business just for the money, start a business to provide value & make a difference. If you are in this just for the money, you’ll experience burnout and displeasure at the process. None of it will be fun. When you provide value & start making a difference, you’ll get way more satisfaction in your business.
- Find a Side Hustle
- Start Freelancing on the Side to Create Funds
- Start Flipping Items
- Use Credit Cards if You’re Making Money
- Borrow Against Your Home if You’re Making $$
- Cash in Retirement Accounts if You’re Making $$
- Get an SBA Loan
People also ask
There are three “most-used” ways that a family member can loan you money. The first way is family members can give you up to $15,000 per year as a gift. The second way is they can loan you money with a written agreement to pay it back. The third way is through buying equity in the business & sharing that percentage of the profits each year.
AFRs are published monthly and represent the minimum interest rates that should be charged for family loans to avoid tax complications. The Section 7520 interest rate for March 2020 is 1.8 percent.
Nothing in the tax law prevents you from making loans to family members (or unrelated people for that matter). However, unless you charge what the IRS considers an “adequate” interest rate, the so-called below-market loan rules come into play.
Your business must have fewer than 500 employees, and less than $7.5 million revenue on average each year for the past three years. Your net income must be under $5 million (after taxes and not counting carry-over losses), and your tangible net worth must be less than $15 million.
Ineligible businesses include those engaged in illegal activities, loan packaging, speculation, multi-sales distribution, gambling, investment or lending, or where the owner is on parole.
For startups and other small businesses that either don’t fit the requirements of typical SBA loans or can‘t afford the down payment, there are SBA microloans. These loans are for amounts up to $50,000, often with no money down.
Expect your score to be a factor in your approval. The SBA does not set a minimum credit score requirement but many lenders will require a personal credit score of at least 640. Here’s how you can increase your credit score by 50 to 100 points in 15 business days.
An SBA 504 loan is commercial real estate financing for owner-occupied properties. … On the other hand, SBA 7a loans can be used to buy a business or obtain working capital. The maximum loan for an SBA 7a loan amount is $5 million. A 504 loan’s interest rate is fixed, and no outside collateral is required.
SBA loans require a personal guarantee from anyone who owns 20% or more of the business applying for the loan. When you sign an SBA loan personal guarantee, you authorize the lender to seize any of your personal assets to repay the loan, if your business assets aren’t sufficient to cover loan payments.
A credit line allows you to borrow in increments, repay it and borrow again as long as the line remains open. Typically, you will be required to pay interest on borrowed balance while the line is open for borrowing, which makes it different from a conventional loan, which is repaid in fixed installments.
Home equity interest rates are lower than business loans because the mortgage lender isn’t taking on the risk of your business. … A home equity loan may be best for one-time businesses expenses, while home equity lines of credit may be better used by business owners as a cash reserve over time.
Your credit score is 620 or higher. …
You have a maximum loan-to-value ratio, or LTV, of 80 percent — or 20 percent equity in your home.
Your debt-to-income ratio is no higher than 43 percent.
You have a documented ability to repay your loan.
A rollover for business startups (ROBS) allows you to invest retirement funds from a 401(k) or individual retirement account (IRA) into your business without paying early withdrawal penalties or taxes.
Microlending is a financial innovation made possible by the peer-to-peer economy. People looking to lend money to earn potentially high returns may fund borrowers who either have no access to credit due to geography or cannot get credit from traditional sources, such as banks or credit unions.
Many venture capitalists will stick with investing in companies that operate in industries with which they are familiar. Their decisions will be based on a proven track record or a cashflowing business model.
SBIR & STTR: Open Solicitations.
U.S. Small Business Administration: Small Business Development Center.
FedEx Small Business Center.
National Association for the Self-Employed: NASE Growth Grants.
Arizona Commerce Authority: AZ Step Program.
Kansas KanView: Job Creation Program Fund (JCF)